Hotels provide relief to franchisees — but some say it’s not enough

Franchisees nationwide want fee reductions from their corporate counterparts because of Covid-19

TRD NATIONAL /
Apr.April 10, 2020 03:00 PM
The relief has varied across brands — from slashed fixed fees to deferrals of certain payments. (Credit: iStock)
The relief has varied across brands — from slashed fixed fees to deferrals of certain payments. (Credit: iStock)

Hotel chains have taken steps to support their franchisees around the country as the coronavirus pandemic has caused prolonged closures.

But some franchisees, struggling to keep staff on their payrolls and cover debt service payments amid emptying-out properties, say efforts from their parent companies aren’t enough.

Among the issues hotel owners and operators have been seeking guidance on because of the pandemic includes their requirements under agreements with franchise companies, along with their requirements with lenders, said Yariv Ben-Ari, a partner in the real estate department at law firm Herrick Feinstein.

The relief has varied across brands — from slashed fixed fees to deferrals of certain payments.

Hilton Hotels & Resorts, for instance, has adjusted its cancellation policies and relaxed certain brand standards, while asking legislators for loans to help franchisees keep their properties open. A Hilton spokesperson declined to provide more details, noting that agreements with franchisees are confidential.

And Best Western announced in mid-March that it was cutting its monthly fees and its property revenue management fees to franchisees in half, among other measures.

These moves help provide substantive relief, said Sagar Shah, managing principal of Yatra Capital Group, which operates a franchised 14-key Best Western Plus hotel in Shillington, Pa, among other properties. But not all companies have offered such financial or brand management aid, according to several franchisees.

“There are other brands that are not following suit and are still expecting us to contribute significant fixed expenses and fixed fees back to them, despite having next-to-zero cash flow,” Shah said.

Hoteliers have been hit especially hard because of the timing of the virus, which has led to travel restrictions that have left more than three-quarters of hotels across the country sitting empty. Major chains have slashed corporate staffs and salaries and had lobbied the White House for a piece of the historic stimulus measure that was adopted last month to bolster the U.S. economy.

IHG Hotels, a major hospitality chain that runs over a dozen brands like Holiday Inn and Crowne Plaza, for instance, has not provided financial relief that owners desperately need, as scores of hotels shutter or lay off staff, Shah and other franchisees told The Real Deal.

Shah, whose company also has a 135-key Holiday Inn Express and Suites is in York, Pa., said the typical revenue management fees he’s required to pay could cost him about $1,050 per property. But IHG has not waived that charge, even though there is no revenue coming in to “manage,” he maintained. Instead, the hotel brand has cut the fee by a few hundred dollars — a move Shah said is not helpful.

“It’s not really substantive relief that they’re providing to us, of what we’re looking for. What we’re looking for is really deferment of royalties and … marketing fees,” said Shah, who said he has had to lay off 95 percent of his staff.

In a statement, an IHG spokesperson said it has been working with owners since the beginning of the crisis. The company, which has cut corporate costs by $150 million through actions like salary reductions, said it relaxed its brand standards in several areas like housekeeping, along with deferring investments and delayed renovations, which allows owners to have more cash on hand for payroll and other costs, the spokesperson said.

IHG also has implemented some forms of fee relief, including payment deferral options and half off service contribution fees and 25 percent off technology fees.

“At IHG, we know that Covid-19 is having a tremendous impact on our owners, and colleagues, and every action we are taking is with them in mind,” the spokesperson said. “We are working constructively and in close coordination with owners of IHG-branded hotels, doing everything we can to reduce costs across the board while also maintaining high levels of service and support to help owners manage through this unprecedented situation.”

Offering “pennies”
Another IHG franchisee, Manav Singh of Sintel Properties, which has hotels and retail centers in Ohio, also described the assistance IHG is offering as “pennies.” Singh and Sagar said they connected with each other as the coronavirus crisis began to escalate around the country, and it was clear that small hotel owners would need more assistance.

“Hotels don’t have the money to pay [fees],” said Singh, who said he is paying employees out of pocket. “We’re going to pay our debt servicers, we’re going to pay our staff. We’re going to pay the water bill, the electric bill, before we ever think about paying IHG.”

And when a local hospital approached Shah to possibly lease out his Holiday Inn, in the event it needs more beds for its Covid-19 response, he said he went to IHG for guidance: IHG allegedly instructed him to cover up his signage at his sole expense, and IHG told Shah it still expected to receive royalties from the hospital’s use, the hotelier said.

“They’re pretty much tone deaf to the needs of the small business owner,” Shah said. “They’re very detached from the reality on the ground of what we’re dealing with.”

The IHG spokesperson said it has asked hoteliers that cover signs if they are used for other uses to “minimize confusion or health risks of potential guests inadvertently entering or attempting to stay at the hotel.” And if an owner donates the facilities for use by health care professionals or first responders, IHG would not collect fees, the spokesperson added.

IHG is not the only hotel chain where owners have been left wanting.

More than 6,300 people signed a petition against Choice Hotels International, calling on the company, which includes brands like Comfort and EconoLodge, for leniency on certain brand standards and the suspension of royalties and franchise fees. The petition notes that other brands offered “immediate materially impacting concessions” but Choice did not.

“Tone-deaf” exec team
“This highlights the tone-deaf nature of the executive team and those in the C-suite,” the petition states. “Sitting in their plush corporate offices, they do not understand the realities we are facing on the ground as struggling hoteliers attempting to stay afloat amidst an unprecedented global crisis.”

Rich Gandhi, of New Jersey-based GHM Properties, owns a Choice hotel in upstate New York, which he said the parent company locked out of its reservation system because of a dispute that arose before the pandemic. Gandhi said he has long been asking Choice to be more transparent about its fees, a concern he said has intensified as the pandemic continues to batter hotels. (A Choice spokesperson said Gandhi is no longer a franchisee because of “longstanding issues” with financial obligations and brand standards.)

On Thursday, in a filing with the U.S. Securities and Exchange Commission, Choice said it has taken steps to help franchisees. Along with cutting compensation at the corporate level and implementing a hiring freeze, Choice said it has put in place a fee-deferral program and put a stop to quality assurance reviews. It also has suspended certain brand standards and helped in advocacy efforts for hotel owners, among other steps, a spokesperson said.

But Gandhi called the company’s announcement a “sham.”

“They basically tie your hands, tie your feet, then basically put you in a boxing ring and say go box,” he said.

For instance, Choice owners can defer their fees because of Covid-19, but if they do so they waive the right to terminate their franchise agreement early, among other contingencies, according to a copy of the deferral notice reviewed by TRD.

A Choice Hotels spokesperson said the company has “taken decided action” to support its franchisees, “not only with tools and resources to assist with daily operations, but also in implementing policy and fee changes that immediately help their bottom line.

As for the terms franchisees must abide by to defer fees, the spokesperson added the company’s intent is to make sure the payback period for fee deferrals matches the length of the contract with franchisees.

The pandemic has battered every hotel around the world, and, for the most part, it appears franchisors have taken the necessary steps to help owners, Ben-Ari of Herrick Feinstein noted. Some companies have suspended contributions to furniture, fittings and equipment reserve funds that franchisees are required to maintain for things like furniture replacement, he said.

Still, Ben-Ari noted that franchisees that are struggling and need more assistance should contact their franchisors sooner rather than later.

“It’s better to have a dialogue now and work with them,” he said. “I think everybody recognizes the pandemic is affecting everybody individually on a human basis, and people are treating each other positively on a business and personal basis.”

Because the majority of hotels in the U.S. are franchised, they are owned by small businesses that may not have the same resources as their larger corporate counterparts.

“It’s a really urgent situation for hoteliers and small business owners because we were just coming out of slower winter months … most of us are not well funded to get through this,” Shah said.

Rich Bockmann contributed to this article.

Write to Mary Diduch at [email protected]

 

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